Ethical Issue Case Summary: The long-term creditors of Company R made conditional agreement that the company cannot purchase treasury stock more than the amount in the balance of the retained earnings , the long-term debt may not exceed the stockholders equity , and the current ratio should not fall below 1.50 at any point of time. If such conditions are violated the lenders of the company will take over the management of the company. Recently Company R is facing a low demand for the products and its current liabilities grows faster than the current liabilities, resulting in the current ratio become 1.47. The management is worried to work out something before releasing the financial statements. The controller suggested to convert the long-term investments into short-term by choosing to payoff within one year. The board of directors votes for the recommendation of the controller to reclassify the long-term investments to short-term investments. To Ascertain: The effect of reclassification of investments on the current ratio, and if the financial condition of Company R will be stronger by such re-classification.

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Chapter 15, Problem 15.1EI

1.

To determine

Ethical Issue

Case Summary: The long-term creditors of Company R made conditional agreement that the company cannot purchase treasury stock more than the amount in the balance of the retained earnings, the long-term debt may not exceed the stockholders equity, and the current ratio should not fall below 1.50 at any point of time. If such conditions are violated the lenders of the company will take over the management of the company.

Recently Company R is facing a low demand for the products and its current liabilities grows faster than the current liabilities, resulting in the current ratio become 1.47. The management is worried to work out something before releasing the financial statements. The controller suggested to convert the long-term investments into short-term by choosing to payoff within one year. The board of directors votes for the recommendation of the controller to reclassify the long-term investments to short-term investments.

To Ascertain: The effect of reclassification of investments on the current ratio, and if the financial condition of Company R will be stronger by such re-classification.

2.

To determine

To Ascertain: If the managers of Company R have behaved unethically.

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